- The Washington Times - Thursday, August 31, 2000

The mainstream media which have never met a broad-based tax cut they liked are swarming all over George W. Bush's tax-cut plan. It will bust the budget. The numbers don't add up. It will cause inflation and trigger Fed tightening. It only helps rich people. Polls show it to be unpopular. And on and on.

Apart from the fact the media is usually biased against supply-side tax cuts, the rest of these criticisms are simply untrue. Mr. Bush's plan will in fact nourish economic prosperity through across-the-board reduction of marginal tax-rates.

Without inflation. Without undermining financial balance. Everyone will be helped, and no one will be hurt.

The plan drops the top personal rate to 33 percent, the middle rate to 25 percent and the lowest rate to 10 percent. It eliminates the estate tax, relieves the marriage penalty and eases the burden on successful low-end wage-earners.

Actually, the lowest earners get the biggest percentage tax reduction. Those formerly in the 15 percent bracket will be shifted down to 10 percent, a 33 percent rate reduction. Upper-end payers receive a 17.5 percent percentage reduction, moving to 33 percent from 40 percent.

Mr. Bush's plan also compensates successful low-end taxpayers as they move up the income ladder and forgo the earned income tax credit. Currently, those moving above the $25,000 range face 40 percent to 50 percent marginal tax rates. This is a severe penalty for hard work. It is a major disincentive that Mr. Bush describes correctly as a "tollgate" to the middle class.

Mr. Bush's new proposal, however, by lowering the bottom tax bracket to 10 percent, and doubling the child tax credit to $1,000, removes roughly 6 million families from the tax rolls and lowers the marginal tax-rate on millions of others by more than 40 percent.

As for the upper end group, politically incorrect though it may be, these are the "economic activists" (Irving Kristol's old term) who have the greatest impact on growth and wealth. They are the most substantial investors (saving roughly 20 percent of disposable income), entrepreneurial risk-takers and new venture seed-capital suppliers in the economy.

Dropping the top rate to 33 percent from 40 percent provides a nearly 12 percent increase in after-tax pay (they keep 67 cents on the extra dollar earned, rather than 60 cents). This incentive effect rewards the extra hour worked, the extra dollar earned and the extra risk taken.

Former Treasury economists Gary and Aldona Robbins calculate that the Bush tax plan could increase gross domestic product by roughly 1.5 percent over 10 years. That could mean an extra $250 billion per year in national output.

The demand side effect of shifting tax revenues from public to private hands amounts to just 1 percent of the level of future GDP. But the positive output effects will push out the economy's aggregate supply curve and thus absorb higher consumer demand without raising prices.

So there is no need for Federal Reserve anti-inflation credit tightening. The productivity gains from higher after-tax returns to saving and technology investment will expand the economy's potential to grow, reduce inflation, put downward pressure on market interest rates and strengthen the dollar.

Turning back to the $250 billion growth dividend from lower tax-rates, the current 30 percent average marginal tax-rate for upper-income workers would generate an extra $60 billion per year in tax revenues.

This is why the Robbins believe that the positive output effects of Mr. Bush's plan will recapture 70 percent of the so-called static revenue loss calculated by the Congressional Budget Office and the Joint Tax Committee. These agencies score the plan as a $1.3 trillion revenue loss, or $1.5 trillion, including higher interest expense. Actually, the $1.3 trillion neatly matches the government's last two upward surplus estimates. However, with the Robbins' growth dividend, the actual reduction from the current services revenue baseline may be less than $400 billion by 2010.

Nominal GDP, or total spending in the economy, is expected to rise by $5.775 trillion over the next 10 years. So the $400 billion revenue loss from lower marginal tax-rates amounts to only 7 percent of the gain in national income, or less than 1 percent per year. This is a very small price to pay for a policy that will expand economic growth and after-tax take home pay for all working Americans.

And don't forget that total tax revenues are expected to rise to $3.1 trillion by 2010, according to CBO estimates, a roughly $1 trillion rise from the fiscal 2000 level. So if revenues rise by $600 billion instead of $1 trillion, the federal government is still reaping a huge windfall.

That it may reap less of a surplus tax revenue windfall over the next decade is an important goal of the Bush tax-cut plan. CBO estimates $4.6 trillion in budget surpluses over the next 10 years. But that overflowing barrel of tax surpluses should not be gobbled up by the federal government.

People will spend their own money more wisely, and the free enterprise private sector economy will allocate resources more efficiently, then government planners and targeters will.

Anyway, it is not the government's money, it's the taxpayers money. I love it when politicians tell us we mustn't "spend" the surpluses on tax cuts. Just in case Messrs. Gore and Lieberman forget, it is the people's surplus, not Uncle Sam's.

Measured in static revenue terms, the Bush tax-cut plan uses only about 30 percent of the expected $4.6 trillion of surpluses. The projected $2.3 trillion in Social Security surpluses are untouched. Roughly $800 billion of the estimated surpluses will remain available for debt reduction, defense strengthening, education, health care and other true priorities.

These numbers are all mind-boggling and eye-glazing and intelligence-numbing. Much sound and fury signifying very little. The essence of the tax debate should never rest on the numbers.

Steve Moore and I have re-estimated the CBO baseline to reflect historic post-WWII trends of 3.5 percent average annual economic growth and 7 percent tax revenue growth. This is a 50-year history that is ignored by a budget office that insists on low-balling U.S. economic performance with only 2.7 percent annual economic growth and 4.4 percent tax revenue growth.

Using historical growth trends, budget surpluses over the next decade could easily rise to $7 trillion, 50 percent above the CBO estimates. Indeed, at the margin of current economic history, non-inflationary economic growth in the high-tech Internet economy of the past five years has averaged 4 percent yearly with around 9 percent trend growth in tax receipts.

So policy-makers probably have considerably more fiscal resources to employ over the coming decade. Hopefully, a Bush presidential victory will open up a full-fledged tax reform discussion. Thus far the Texan has supported a fiscal rule that would limit the federal tax take to no more than one-third of personal income.

However, should the technology economy continue to flourish, then that rule could be hardened to one-quarter or one-fifth. Full-scale tax reform should also include a significant decline in corporate tax-rates and a major acceleration of business depreciation write-off schedules for the purchase of new equipment and other investments.

Ankle-biting and nitpicking from the big government left must not be permitted to obscure the marvelous possibilities of the new era of fiscal prosperity. Liberals will do anything to prevent a tax cut. Don't cut taxes with budget deficits, don't cut taxes with budget surpluses. Just don't cut taxes.

The real liberal agenda is to prevent power from being taken out of D.C. Within that agenda is the age-old liberal desire to increase the federal role to regulate the economy and distribute its resources.

Al Gore announced roughly $2 trillion of spending programs during his Los Angeles convention speech. Yet few media commentators argue that nationalized health care, a spate of new transfer and entitlement programs, or his business-bashing, would bust the budget or harm the prosperity.

George Bush's tax-cut plan provides a clear free-market alternative to Mr. Gore's vision. The Texan's program is a good deal for taxpayers and the American economy. The plan is affordable, and it packs a big economic bang.

For the first time in 20 years, really since the Reagan-Carter 1980 race, American voters have a clear choice. It is not a choice about numbers, but about vision.

I believe the new wave of small business owner-operators, shareholding investors, technology entrepreneurs, and the expanding middle-class ranks of opportunity-minded Latinos and African- Americans, will carry the day for Mr. Bush's 21st century vision of economic freedom and personal responsibility.

Today's changing America is on the move, and it is moving forward. As former President Reagan told the Republican Convention in 1988: "We are the change."



Lawrence Kudlow is chief U.S. investment strategist and chief U.S. economist at ING Barings LLC.

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